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Subject: Term R^2

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Margaret Ruppert

01/14/2010 12:50 PM
Can someone please tell me what this term means and how it pertains to my reading it on the ssg.

Doug Gerlach
http://www.iclub.com/
StockCentral Founder

01/14/2010 1:52 PM

From the current edition of the Toolkit 6 manual, here's the description:

"R^2 (R2 or R-squared) is an indicator of how well the historical data conforms to the trend line that is calculated by the program. Toolkit uses the “least squares” to find the trend line that lies closest to all of the plotted points. The R-squared value measures how closely the plotted points are to the trend line, and ranges in value from 0 to 1.
The closer the number is to 1 the better, with 1 representing perfect correlation and 0 representing no correlation. On the front page of the Stock Study, the R-squared values are for all years of data, even if you have removed some years as outliers."

In other words, the R^2 value shows you how straight the EPS points are to the EPS trend line. It's useful to understand R^2 when screening, for instance, so you can find consistently growing companies.

Doug

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